On his numbers the average deficiency in 2011-12 to 2013-14 will be 180,000 homes, compared with average starts of 156,000.

“The underlying dwelling deficiency will be the key to preventing substantial declines as seen in the US," he said.

The deficiency varies from state to state, from massive in NSW, to fewer starts than needed in Queensland and Western Australia, to a weak deficiency in Victoria, and to oversupply in South Australia and the ACT.

The other key element in the BIS Shrapnel outlook is the return of the first-home buyer.

First-home buying soared in 2009 with the first-home buyers grant boost and low interest rates, and then collapsed in 2010 as both stimulants were withdrawn.

Mr Mellor said the number of loans to first-home buyers had been slowly stabilising in 2011.

In the June quarter, first-home buying jumped in Queensland, the ACT and particularly, up 20 per cent, in Western Australia.

The experience with the additional first-home owners grant last decade, also points to further first home buying to come.

“As growth in loans to first-home buyers returns, some improvement in non-first-home buyer activity should also emerge,’’ said Mr Mellor.

Investor demand is likely to remain weak until prices stabilise, over 2011-12 as the first-home owner demand kicks in. BIS Shrapnel has produced the LMI Housing Outlook for 10 years and this report comes with an assessment of the accuracy of the predictions.

“If anything, we have been too conservative," said Mr Mellor pointing to the times when prices had risen more strongly than BIS predicted.

QBE LMI chief executive Ian Graham was upbeat.

“Australia is well placed to deal with any uncertainty that our economy or housing market faces in the next couple of years," he said.

“We don’t seen any conditions that would adversely affect the market in the next three years."